We recently spoke with Fredrik Voss, a Vice President at Nasdaq, about blockchain technology. Fredrik has held various positions within the technology and transaction divisions of Nasdaq. He’s currently responsible for Nasdaq’s blockchain innovation initiative. Excerpts from our conversation follow.

How can blockchain technology potentially alter the financial services industry?

Blockchain technology has been touted as addressing the issue of trust, but we don’t necessarily see trust in infrastructure being a big issue. Rather, we see it as a way of increasing efficiencies of various kinds. The debate about trust has really been focused on behavior in the market.

What impact will blockchain have on U.S. public companies?

In the very immediate future, I would not expect that much of an impact. However, in the medium to long term, as this technology gains increased use, there will certainly be the potential for more efficient primary and secondary markets in relation to how their shares are listed and processed. Also, if you leverage the full capabilities of the technology, you can certainly see how, for example, a company would get a much better insight into flows of their stock from an investor relations perspective: who owns the stock and where has it been. We see it from our Nasdaq Private Market initiative, where we can actually provide a full account of a share certificate’s historic whereabouts.(1)

What should public companies and their boards be thinking about to prepare for blockchain?

I wouldn’t rush out and start to define a “blockchain strategy” or anything like that, unless you’re engaged in the plumbing of capital markets, auditing, or regulatory matters as a line of your business. Rather, a viable approach is to analyze and research this space if this technology can potentially bring benefit to you, as a listed entity or in your overall business activity. Then start to think about how your company could drive this evolution in a meaningful direction. It will be a while before we start to see any meaningful impact on the day to day operations of a publicly traded entity.

Other than financial services, what are some other industries where blockchain has the most potential?

When we look at the technology and what is it good at and try to generalize that, the strength in this technology lies in its ability to track possession of any digitized asset. A digitized asset could be a security or it could be money, but it could also be health records, it could be votes, it could be a deed of ownership. So generically, this technology has the potential to be useful for any industry where you have possession of an asset, with “asset” being defined in a very broad way.

How do you expect blockchain to be regulated as this technology continues to evolve?

There are a couple of dimensions to that question.

In financial and capital markets a technology isn’t usually regulated as such. Typically, regulation sets out a number of criteria a business operation needs to meet. And then, of course, businesses use technology to deliver services, so implicitly the technology needs to meet those regulatory criteria. But regulation tends to be technology agnostic in our space, but of course, we and others that deploy the technology need to demonstrate that the technology meet the relevant regulatory criteria; for example: business continuity plans, that it’s secure, that it’s fit and proper for the use.

A second dimension is that regulation tends to also regulate various business models. And this technology actually could be disruptive to certain business models that are in existence today. If those business models become obsolete, we certainly would then have regulation that doesn’t regulate anything, because no one would use that kind of business model. That is not really a problem, to have redundant regulation. What is more interesting is if the technology allows for the birth and evolution of new business models that don’t exist today, we could have a situation where current regulations haven’t contemplated these new business models and there would need to be some legislative and regulatory catch up.

What do you foresee as the biggest risks in the use of distributed transaction ledger like blockchain and what can be done to mitigate those risks?

It’s a little bit premature to ask a precise question like that in relation to a technology that’s in its infancy. The technology is so far really only proven for use in the cryptocurrency space. Now, there have been issues in the cryptocurrency space with e.g. stolen bitcoins. But, if you look behind that, the underlying blockchain technology has remained very solid. It has survived attacks of various kinds.

For almost every other use case, we are just beginning to deploy the technology. What we can say with certainty is that the technology remains to be proven from many different perspectives: from scalability, to performance perspectives, security perspectives and so on. We are really just in the infancy in proving that the technology has the necessary qualifications to be deployed on a larger scale in larger markets. I think we need to run with the technology at least for another year or so and at that point in time, we’ll know more of what the potential issues might be. With the increased allocation of resources to this space from both newcomers and incumbents it is however noticeable how rapidly the blockchain space is evolving. Hence, innovation and disruption in this space may come quicker than one would expect.

What is your sense as to the level of trust that people have in this technology?

Nasdaq considers that we are really in the business of changing attitudes. What we are doing now with our use cases -- Nasdaq Private Market, proxy voting in Estonia, and other future use cases -- we are really in the business of creating acceptance and positive attitudes to the technology with a wider audience. (2) And that takes a bit of time.

In 2015, there was a lot of talk about this technology and about for the use of it beyond cryptocurrency. In 2016, we will start to see more and more of alternative use cases being tried that will deploy the technology in those use cases. So perhaps towards the end of 2016, we will have much more data in terms of what is the technology good at, and also we will identify what the risks are, and whether they are difficult to mitigate.

Also, at that point in time, it will be easier to do a forecast of how long time it will take before we see mass or large scale adoption of the technology.

In December, Nasdaq recorded the first securities issuance for a private company on Linq, a blockchain enabled platform for managing unregistered securities. Can you describe that transaction and what was learned from it?

Our partners at Chain, who helped build the solution, issued shares via Linq. Traditionally in the United States, paper-based certificates are issued when a company issues shares. In this case, they instead issued those shares in truly digitized format on the blockchain. So it wasn’t a copy of some paper. The only legal representation of ownership for that share is the blockchain representation of that share. That was a significant breakthrough: to demonstrate that is possible technologically, but also legally, to demonstrate that the record of ownership can be digitally represented on the books and records of the company.

Further, there were investors buying that share that sent money to the issuing company, Chain, and Chain sent back the share using the blockchain to the investor. Because Linq is able to facilitate the transfer of funds, all the steps required to close the transaction occurred on the platform. Once all the appropriate documents are e-Signed in Linq, the platform is able to facilitate the transfer of funds and movement of securities simultaneously, with all relevant information recorded in a single blockchain transaction.

If you could foresee a company that maintains its entire shareholder base via the blockchain technology, they would know exactly how many shareholders they have, who they are, and they could watch the changes to their shareholder base in real time. Is that correct?

That is exactly the goal. By representing all equity related transaction in Linq, the issuer is able to view full chain of custody of all shares. What’s more important is that all transactions from that point forward will be informed by the immutable current holdings of each shareholder, greatly reducing potential for error and overhead associated with reconciliation of data from various sources. Also, because all transactions have to be executed on the same dataset visible to the company, the issuer has real-time insight into changes in their equity profile and is better positioned to exercise rights of first refusal and enforce restrictions.

You could have a real time view of buying and selling.

Yes, exactly.

It would be slightly different in the public domain compared to the private domain, of course. We picked the private market to demonstrate the capabilities of the technology, but it’s a less complex infrastructure ecosystem. There are fewer systems that this solution needs to be integrated with. It’s a lower regulatory complexity. But fundamentally we have demonstrated exactly what you were asking about.

And this could change the entire dynamic of a company communicating with its shareholders.

A: Shareholder communications, when there are dividends, or corporate actions: you would know the whereabouts of every single security impacted by a communication, corporate action or any other kind of decision. You would have an immediate reach to your investor base.

That’s a huge paradigm shift.

It is. Though we still recognize that in the private market you have very little intermediation. There are the investors and the issuing companies. We don’t necessarily think that every intermediary would disappear from the public landscape. We think what they would do may shift quite significantly however. We would still have custodians, intermediaries between the ultimate investor and the blockchain, but you could certainly create an infrastructure that lends itself to a much better dialogue between the issuing company and the end investor.

(2) Later this year, in a pilot program, shareholders of companies listed on Nasdaq's Tallinn Stock Exchange, Estonia's only regulated securities market, will be able to vote remotely in shareholder meetings facilitated by a blockchain based solution.

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